EBay to buy back billions in stock / Company meets analyst prospects for 2nd quarter

Verne Kopytoff, Chronicle Staff Writer

Published 4:00 am, Thursday, July 20, 2006

Providing a modest boost to its depressed shares, eBay Inc. reported second-quarter results on Wednesday in line with analyst expectations, and it disclosed plans to buy back up to $2 billion in stock in what would be the first share repurchase in the Internet giant's history.

At the same time, the San Jose online marketplace addressed fears about a slowdown in the company's e-commerce business by saying it will raise fees for sellers who operate online stores, a move that will inevitably elicit grumbling from some of the Web site's users.

EBay's second-quarter earnings come as the company stands at an important crossroads since its founding 11 years ago. Although still highly successful, the company is increasingly looking to its online payment division, PayPal, as well as its Skype Internet calling service, to be its future financial engines while coping with a changing e-commerce landscape brought on by online advertising and the increasing popularity of search engines.

News of eBay's stock buyback, a technique frequently used by companies to reverse slumping share prices, immediately had the intended results in after-hours trading on Wednesday, following the earnings report. The shares jumped $1.45 to $27.38, an increase of 5.6 percent.

How Holocaust Survivor Judith Leiber Became a Handbag LegendTownAndCountry

EBay's shares have been in a free fall since the start of the year, losing 40 percent of their value. The share buyback will take place over the next two years and include purchases on the open market as well as through private deals.

During the second quarter, eBay's profit fell 15 percent to $249.9 million (17 cents per share) from $291.6 million (21 cents) in the same period a year ago. A change in how the company accounts for stock-based compensation was responsible for the decline.

EBay's revenue rose 30 percent to $1.41 billion from $1.09 billion in the second quarter of 2005.

Meg Whitman, eBay's chief executive, acknowledged the slowdown in her company's marketplace, particularly in the United States, due to its maturity. But she added, "Our business continues to thrive. Where there are challenges, we are moving to meet them."

A key theme in Wednesday's conference call with executives was their efforts to reverse what they called an imbalance in the U.S. marketplace. The Web site, Whitman said, is overwhelmed by listings from eBay Stores, an area exclusively for sellers to post fixed-price merchandise that can be bought instantly.

At any given time, around 83 percent of all listings on the Web site are from Stores, which number 255,000 in the United States.

The plan is to raise prices for such listings by an average of 6 percent starting on Aug. 22 to encourage users to sell in the auction format instead. The company has determined that those "core listings" sell 14 times faster than items that are available in Stores.

The change, coupled with efforts to make store listings less prominent in search results, is intended to accelerate eBay's business, executives said. The company expects to collect more fees from the quicker turnover of merchandise and to reduce hosting costs.

Buyers will also be happier, Whitman said, because of their preference for the auction format, the classic way of selling merchandise on eBay, and because items will be easier to find. Though sellers who use Stores may initially complain about the higher fees, they will ultimately be pleased with the results of shifting to auctions, she said.

Martin Pyykkonen, an analyst for Global Crown Capital, was concerned about how some of eBay's biggest sellers may react to the increase in fees. He said eBay could run the risk of alienating some Stores users, causing an unintended dip in the fees it collects.

EBay users are notoriously vocal about fee increases, and, in the past some have vowed to boycott the Web site. However, eBay has managed to keep growing despite the discontent, largely because of its position as the leading e-commerce site.

As for the buyback, Pyykkonen called it better than nothing. He said he had hoped the company would spend more than the up to $2 billion it has committed to the program.